Bank of Japan fires latest shot in currency wars

Updated
April 05, 2013 17:27:00

The Bank of Japan has officially announced its new stimulus measures. Over 7 trillion yen will be pumped into the Japanese economy over the next 2 years. Fund managers argue it's another bold attempt by Japan to lower the yen.

ELIZABETH JACKSON: The Bank of Japan has fired the latest shot in the global currency wars. The country's central bank has announced it'll pump over 7 trillion yen into the Japanese economy every month for two years.

The aim is to lower the value of the currency, and haul the world's third largest economy out of a protracted slump.

Will it work, and what will be the repercussions?

Here's our finance reporter David Taylor.

DAVID TAYLOR: Central Banks around the world are flushing their economies with cash. It's part of a so-called currency war - each country desperate to lower their currencies to boost export growth and avoid deflation or falling prices.

The logic is that by pumping money into the economy, interest rates fall, and the value of your currency then drops, helping to attract export demand.

How has it come to this? Well, policy-makers are running out of options to boost growth as consumers hoard cash and the budgets of many governments around the world become constrained.*In Japan's case, this latest round of money printing is especially big and bold.

HUW MCKAY: That the Bank of Japan now realises that ordinary policies will not do.

DAVID TAYLOR: Huw McKay is a senior international economist with the Westpac Bank. He says Japanese policy-makers have a huge job on their hands.

The economy has been in and out of recession for decades and is struggling to achieve any level of inflation. The goal of this latest cash injection is to make sure prices start rising, not falling.

HUW MCKAY: They must get creative and they must jolt the economy onto a different plain.

DAVID TAYLOR: Huw McKay though, is it your view that this will work?

HUW MCKAY: Certainly what we've seen to this point is that they've got some currency depreciation that will bring imported inflation into the country and they have made an impact on the psychology of both households and markets and as those economic agents start to make decisions going forward, perhaps we will get a little bit of self-fulfilling momentum in the Japanese economy.

But there's a lot to prove down the line but for the moment Kuroda has shown that he gets it, he knows that it's an expectations game and he has been prepared to act aggressively, and in central banking terms, you know, in normal times you would say irresponsibly, to jolt expectations in the desired direction.

DAVID TAYLOR: But international fund managers argue the new governor Haruhiko Kuroda's key concern is simply to lower the yen.

On that front he's competing with the power of the US Federal Reserve, as America also tries to revive its economy through exports.

BILL GROSS: So while we were thinking, you know, much more depreciation of the yen has to take place in order to get anywhere close to 2 per cent and you know, would that be "permitted" quote, unquote by the G7 countries in terms of their own you know particular environment. No country wants to get depreciated against.

DAVID TAYLOR: And that's where Australia comes in. Economists argue that as the currency wars devalue currencies like the yen and US dollar, the Australian dollar rises in value.

Huw McKay again.

HUW MCKAY: There is going to be a QE (quantitative easing) premium priced into the Australian dollar for the foreseeable future.

DAVID TAYLOR: Huw MacKay says as long as the world's big central banks are engaging in QE or money printing, the Australian dollar's value won't reflect its true fundamental worth.

The Bank of Japan meets again on April the 26th to work out the final details of its new plan.

ELIZABETH JACKSON: David Taylor reporting.

*EDITOR'S NOTE (30 April 2013): Language used in the original broadcast item was not sufficiently clear on the issue of financial limits on government. The transcript has been amended to clarify this.